Average Cost Inventory Method - Material Cost, Cost Accounting Video Lecture | Cost Accounting - B Com

well FIFO and LIFO are a little bit
confusing for some people when their
computing inventory so luckily there's a
very easy method for computing ending
inventory and cost of goods sold and
it's called the average cost inventory
method so basically we'll just use the
same example that we used in our FIFO
and LIFO videos you have a company that
sells t-shirts and so you sell 250 of
your t-shirts 250 sold and now you need
to compute cost of goods sold and you
need to compute ending inventory and you
need to know how to do that so let's
take a look at our books let's take a
look at our our purchase history and see
how we go about computing cost of goods
sold and ending inventory so here our
purchases we made purchases on three
dates and here are the various units
that we purchased the number of t-shirts
and the price we paid for each t-shirt
and then the total cost when we when we
go and multiply out the units by the
price so with the the average cost
inventory method it's actually quite
simple we're just going to add up the
total number of units that we purchased
so this would be five hundred and
seventy five so that's just the 200 plus
the 150 plus the 225
that gives us five hundred and
seventy-five units total we've purchased
and then we just add up the cost now
again to get each cost we just say okay
in March first we bought 200 units for
$10 each that's two thousand right so
that's where we get the subtotals of
this total cost category but now we just
we just add all this up and what does
that give us well it gives us seventy
four hundred dollars and now we just
take this seventy four hundred dollars
and divide it by the number of units we
purchase by five hundred and
seventy-five to get the average cost per
unit that's why it's called the average
cost method so we'll just say let's
let's see here let's do this math so
$7,400 divided by five hundred and
seventy-five
units is going to give us an average
cost of twelve dollars and 87 cents and
that's rounded twelve dollars and 87
cents per unit that's the average cost
so now when we want to compute cost of
goods sold for example we'll just say
okay our cogs is going to be equal to
now how many shirts did we sell what we
sold 250 right that was given 250 shirts
times this $12 and eighty-seven cents a
unit times twelve
eighty-seven and that's going to yield
three thousand two hundred and seventeen
dollars okay now we want to know about
our ending inventory which I'll just
abbreviate AI ending inventory right so
cogs is is that this is the inventory
we're moving off the books we've sold it
and now we want to compute well what
inventory is left what if we look at the
balance sheet what should our inventory
be pieced a today so now we can't just
use the 250 because that's what we sold
that's what we got rid of so we got to
say well what's the total we had which
is 575 - what we got rid of which is 250
so we just say I'll just put this in
parenthesis 575 what we started with -
250 what we got rid of and now we
multiply that which is I think 325 we
just multiply that by 1287 our average
cost right we're using the same average
cost to compute cost of goods sold and
ending inventory now what is this this
yield for our ending inventory we're
going to have ending inventory of four
thousand one hundred and eighty three
dollars and you see that it's exactly if
you if you add these two up you just get
what the total cost was